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3 Jul 2015
What happens to the Euro post the Greece referendum? – BNPP
FXStreet (Barcelona) - Steven Saywell of BNP Paribas, believes that a ‘yes’ vote in the Greece referendum will be EUR bearish and a ‘no’ would be bullish, but ECB QE will keep driving the single currency lower.
Key Quotes
“We continue to believe that good news on Greece represents bad news for the EUR. The ECB’s quantitative easing programme (QE) is the key factor driving down the EUR, as the single currency is used as the key funding currency for FX carry trades. EURUSD is overvalued versus 2y rate spreads. Disappointing headlines on Greece produce a risk-off approach in markets that results in the unwinding of carry trades and buying back of the EUR. We believe this logic will remain in place around Sunday’s referendum.”
“A ‘yes’ outcome should produce a relief rally in markets and encourage investors to again add to EUR-funded carry trades. This will drive the EUR lower. In contrast, a ‘no’ outcome may produce new risk reduction and a further unwinding of EUR shorts. Our BNP Paribas Indicator reports short EUR exposure at -14 (on our scale of -50 to 50), which is a moderate short but well below the trough of -35 in January.”
“This logic on FX is supported by the relationship with peripheral spreads during the latest round of Greek negotiations since February. The FX interpretation is also consistent with our anticipated response by the eurozone peripheral bond market, including an overshoot in the immediate aftermath of the referendum."
“We continue to favour EUR downside trades expressed via options – especially EURUSD cheapened by RKOs. We maintain our 6m EURUSD put with the 1.10 strike and the 0.9950 RKO recommendation.”
Key Quotes
“We continue to believe that good news on Greece represents bad news for the EUR. The ECB’s quantitative easing programme (QE) is the key factor driving down the EUR, as the single currency is used as the key funding currency for FX carry trades. EURUSD is overvalued versus 2y rate spreads. Disappointing headlines on Greece produce a risk-off approach in markets that results in the unwinding of carry trades and buying back of the EUR. We believe this logic will remain in place around Sunday’s referendum.”
“A ‘yes’ outcome should produce a relief rally in markets and encourage investors to again add to EUR-funded carry trades. This will drive the EUR lower. In contrast, a ‘no’ outcome may produce new risk reduction and a further unwinding of EUR shorts. Our BNP Paribas Indicator reports short EUR exposure at -14 (on our scale of -50 to 50), which is a moderate short but well below the trough of -35 in January.”
“This logic on FX is supported by the relationship with peripheral spreads during the latest round of Greek negotiations since February. The FX interpretation is also consistent with our anticipated response by the eurozone peripheral bond market, including an overshoot in the immediate aftermath of the referendum."
“We continue to favour EUR downside trades expressed via options – especially EURUSD cheapened by RKOs. We maintain our 6m EURUSD put with the 1.10 strike and the 0.9950 RKO recommendation.”